20150120 – IS DENMARK NEXT?

The IMF has followed the World Bank in cutting forecasts for global growth for this year and next. And in order to make today officially gloomy GDP growth day:

• the European Bank for Reconstruction and Development (EBRD) forecasts Russian GDP will shrink by nearly 5% this year;
• Malaysia, one of the largest oil producers in Asia, has cut its growth forecast down from 5 -6% to 4.5 – 5.5%
• and also China published data for 2014 which confirms that last year was its slowest year of growth in 24 years, when it faced sanctions in the wake of the Tiananmen Square massacre.

I don’t know what’s more depressing, the growth data, or the fact that the massacre doesn’t feel like it happened nearly a quarter of a century ago! Needless to say all this news seems to be impacting oil prices which are dipping again after a few days of recovery. You shouldn’t be shocked to hear that the naira, Nigeria’s currency, made a new record low again yesterday and the Malaysian ringitt hasn’t been this weak for some years. Emerging market currencies have done rather well in the last few weeks, it’s just possible that the period of relief might be ending.

It really does feel as if non-Eurozone European central banks are gearing themselves up for imminent QE. The Danish Central bank has lowered its deposit rate from -0.05% to -0.20%. Yes that’s a minus sign you see. Stick your money in your bank account and you’ll pay for your troubles! Oh to be a prudent saver in this crazy world (is it just me or does it feel like some perverse construct from Dante’s Inferno?). Following on from last week’s SNB action it does make one wonder, there are rumours that the market will try to attack the euro – Danish krone peg, all I can say to that is… wow! There is every risk that if the ECB announces QE this Thursday the Danish Central Bank will be forced to cut rates again. I’m only telling you that now, because if the ECB does do some QE I don’t think anyone will be taking much notice about what happens in Denmark!

In Germany the media is ramping up pressure on the ECB, railing against the plan to introduce quantitative easing into the Eurozone. It really does feel as if it’s going to happen. I can’t exaggerate how huge Thursday now feels. It is entirely possible that the euro could end the week substantially weaker than it is today. If you have exposure to the euro, if you own euro denominated assets, it would not be unreasonable to consider protecting yourself. Of course if anything is done, the euro is unlikely to be the only victim, the other major European currencies will likely be losers as well, albeit less so than the euro. So keep an eye out for the Norwegian krone, Swedish krone, pound sterling. Needless to say this could be an inflection point for Mr Draghi, the pressure is rising and if nothing happens, his very credibility is at risk. As a currency trader I must confess I’m really enjoying this… traders love big macro, and it doesn’t get much bigger than this! If we haven’t already mentioned this, EUR/USD is currently trading at levels not seen since 2003. 2003! The euro wasn’t weaker than this at the height of the Eurozone crisis when there were fears that the entire project would be scrapped, it wasn’t weaker than this in 2008 when the global financial system was at risk of implosion. It’s been a strange start to the week here at ParityFX, we have received enquiries from clients about whether the Italian lira is still a tradeable currency, and we have also been asked about the Old Kuwaiti dinar… hmmmm! And here we are with gold trading close to $1300… remember at the end of November when gold traded at $1140? Quite a move…

Later on this morning we get ZEW sentiment data out of Germany. The data is actually expected to show some improvement. I still maintain that lower energy prices will be a boost for advanced economies, and I suspect the anticipated improvement in sentiment is because of that. Just yesterday another of the major gas suppliers in the UK lowered prices for consumers by 5% with immediate effect. This is a good thing. But the deflation narrative is very powerful at the moment, we’ll need to see the positive effect before, in my opinion, common sense prevails. Not much else to look forward to on the data front apart from that, but who cares really? It’s all about Thursday…

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